In December 2024, a High Court of Australia decision substantially altered the legal framework regarding an employee’s right to claim damages for psychiatric harm arising from the dismissal process.

What happened?

The employee was dismissed by the employer following internal disciplinary proceedings concerning alleged misconduct during a work trip. The procedure involved:

• An allegation of “serious misconduct”;
• A stand-down letter and disciplinary meeting; and
• Termination of employment

It was later revealed that the employer considered undisclosed prior allegations not raised during the meeting.

The employee developed major depressive disorder and adjustment disorder, directly linked to the flawed dismissal process.

High Court’s Ruling

Contractual Incorporation of Policies

The Court held that the employer’s Disciplinary Procedure (and enterprise agreement) were expressly incorporated into the employee’s employment contract. As such, they created binding duties on the employer.

Damages for Psychiatric Injury

Overturning the 115‑year precedent in Addis v Gramophone [1909] AC 488, the Court held:

• Psychiatric injury arising from breach of an employment contract is not too remote; and
• Employers can be liable for non-physical harm when foreseeable and rooted in procedural failure.

Negligence Claim Left Undetermined

Whilst the employee also argued negligence, the High Court focused on contract; they did not decide on an employer’s tortious duty in disciplinary settings.

Why It Matters for Unfair Dismissal Claims

Expansion Beyond Statutory Caps

Fair Work Commission awards for unfair dismissal are capped (~$75,000). In contrast, contract-based claims post-Elisha could secure much larger payouts for psychiatric damage.

Shift from Procedure to Remedy

Even if a dismissal is procedurally unfair under statutory law, contract-based claims now offer a parallel pathway for employees, especially where policies are embedded in contracts.

Foreseeability is Key

Employers must now consider the mental health outcomes of failing to follow contractual discipline procedures—anything less than fairness may trigger substantial financial liability.

Key Takeaways for Employers

• Review Employment Contracts – ensure that disciplinary policies are not unintentionally incorporated.
• Communicate Limits – where policies are incorporated, clarify their contractual force.
• Train Managers – emphasise procedural fairness and transparency in disciplinary meetings.
• Support Employee Well-being – document mental health support and reasonable adjustments during dismissal processes.
• Settlement Agreements – draft releases broadly to capture contract-based damages, not just statutory claims.

Looking Ahead

• Expect rise in contractual breach claims post-dismissal, pursuing psychiatric damages.
• Employers might also face negligence actions, as future courts may clarify if a tort duty exists in termination processes.
• Litigation certainty will drive employers to tighten policies, enhance procedural infrastructure, and reconsider how disciplinary frameworks are embedded in contracts.

How can FC Lawyers help?

At FC Lawyers, our experienced business and corporate team can assist with advising on, drafting and litigating matters concerning employment and other related matters.

Contact our team today to discuss your legal needs.